Ad.ly shows Twitter how to make money on Twitter: Targeted advertising

It's no secret that Twitter still hasn't found a way to do much with money other than spend it. The company is pulling back on its plan not to run ads on the site, and continues to say that paid corporate accounts will likely be its ultimate revenue source. While the white-hot microblogging platform's founders try to make this a reality, the businesses that use Twitter are finding ways to make money from it now.

Ad.ly is the latest company to enter the fray. Started by Sean Rad, a 23-year-old entrepreneur, it seeks to do more than push ads into a user's Twitter stream. In fact, Rad appears to have found a way to deliver what Twitter itself has said it wants to include in its up-market version: targeting. This has been the missing link in the Twitter environment; companies have been able to push out their content 140 characters at a time, but they don't really know who they are reaching. Ad.ly appears to have solved this problem.

The Ad.ly streaming process is similar to that of other Twitter advertising platforms (such as Magpie). It pushes a tweet every other day from a Twitter user's account (pending user approval, of course). The user sets the price that the advertiser will pay ... which sounds like a dream. The reason Rad believes the model will work is because Ad.ly screens advertisers before allowing them to participate.

With Ad.ly, the company says, advertisers can connect with influential Twitter members whose followers they think best match their target audience, increasing the likelihood of click-throughs. As result, advertisers gain access to specific segments of the market while wrapping their ads in endorsements. The company has already forged relationships with celebrity tweeters, such as Dr. Drew.

The key to the interaction between user and advertiser is data. Ad.ly gathers information from Twitter users' accounts about their tweeting subject histories and makes it available to advertisers. The people who spend, therefore, can make informed decisions that lead to targeted advertising and, ostensibly, better results. With advertising budgets being cut all over, the measurable, targeted upside is crucial.

Even without platforms like Ad.ly, revenue models involving Twitter are emerging. Bloggers, media websites and other Twitter users with significant followings are already being approached by ad sales executives with packages that include Twitter-based advertising.

The appetite for Twitter-based advertising is salient on both sides of the equation, with bloggers looking for new sources of income and advertisers hunting for better access to their target audiences. "It's everywhere," Mwangaguhunga says, "so it doesn't surprise me to see something like this [i.e., Ad.ly]."

Mwangaguhunga isn't alone in hoping for a way to monetize Twitter – aside from using it as a source of traffic. Every advertiser, corporate marketing department and media outlet that has had an eye on Twitter has at least had passing thoughts about its revenue potential. Ad.ly seems to have a powerful differentiator in its ability to match advertisers with higher-value Twitter users, which could lead to better advertisement performance and increased commitment to the platform. But it's still too soon to tell if Ad.ly has cracked the Twitter code.

Rad's venture has already received a vote of confidence in the form of a recently raised round of funding from GRP Partners. This backer has scored investment wins with Overture, Costco (COST), Starbucks (SBUX) and others.

Meanwhile, Twitter itself is no closer to its goals. It's using the $155 million it raised to finance its operations, and claims to be looking for ways to monetize its product. Though the company says that corporate accounts are the solution, its continuing performance issues will pose a problem down the road – corporate users paying hefty fees probably won't find the "fail whale" cute.